← The Clark Howard Podcast
The Clark Howard Podcast
09.02.25 Ask An Advisor With Wes Moss
00:44:26
The Power of Dividend Growth Explained and Is the Midwest the Next Silicon Valley?
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Transcript71 lines
- [00:00]
Commercial Narrator
This message is brought to you by Apple Card. Apple Card takes privacy seriously. It's your card, your info, your business. So if your credit card is an Apple card, maybe it should be subject to credit approval. Apple Card issued by Goldman Sachs Bank USA Salt Lake City Branch terms and more@applecard.com hey, it's Ryan Reynolds here for Mint Mobile. Now I was looking for fun ways to tell you that Mint's offer of unlimited Premium Wireless for $15 a month is back.
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Wes Moss
So I thought it would be fun.
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If we made $15 bills.
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Wes Moss
But it turn out that's very illegal. So there goes my big idea for the commercial. Give it a try@mintmobile.com Switch upfront payment.
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Krista DiBiaz
Of $45 for 3 month plan equivalent.
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To $15 per month required new customer offer for first 3 months only.
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Wes Moss
Speed slow after 35gb of networks busy.
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Krista DiBiaz
Taxes and fees extra. See mintmobile.com welcome to Ask It Advisor. We're back this week, Wes Moss, Krista Dibiaz with you to answer your investing questions and go deeper on all things having to do with your money and how to prepare for your future financially and dividends. Today we're going to talk. Yeah, you're going to talk. Dividends.
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Wes Moss
Still in love with dividends.
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Krista DiBiaz
That's awesome. And then also the future of manufacturing in the US Productivity, which you had said to me sounds like a boring.
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Wes Moss
Sounds like a boring topic. I usually send you these topics the night before and I said just don't judge this topic before we talk about it because it's really when you hear manufacturing, you think what's so exciting about manufacturing? But one of the cogs within economics is the measure of productivity, which is the output per hour we all work. And that's a super important number in economics. It really matters to the growth of our country. And there are some very interesting signs right now about productivity. So it's really productivity and manufacturing we'll talk about today.
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Krista DiBiaz
Awesome. All right. But first, dividends. And we'll get to your questions. If you have a question for Wes or you have a question for Clark, we're going to one stop shop. For that you go to clark.com/couple times.
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Wes Moss
A year I like to update an article. I think I originally wrote this and it just happened to be in February several years ago. And I wrote about dividends and the growth of dividends that we don't typically think about as much. And it was around Valentine's Day. So the article, I didn't name it this, but I think our marketing team put it out there and said it was an internal piece about dividends and dividend growth. But putting it on the Web, I think maybe for Forbes.com, they named it Falling in Love with Dividends because it was Valentine's Day. But the reality here is that when we think about stocks and we think about bonds, we think, well, we're all trying to grow our money. Total return equals growth plus income. We don't have a whole lot of control over growth because the market will do what it does in any given shorter period of time over long periods of time. We know that we've seen tremendous growth on the stock side or the equity side of the market. But what you don't really hear about is the cash flow that gets paid out and does that grow. And the whole reason we're investing, I mean, if. If you were to boil it down to one reason we're investing to protect our purchasing power. We're investing so that we can keep pace with inflation. So if costs go up two times, we're hoping that our income goes up two times or more. And that's what we've seen over the course of history. If we go back, our team did a study, and again, we update this and just updated it for 2025. If you go back to 1980 and look to see how dividends or The S&P 500, just looking at the dividend side of it, has done through the year 2025. So we're talking 45 years now, the numbers are pretty remarkable. And here are the numbers. If you start with $10,000 and you put it in the S&P 500 back then, you didn't get. Well, at the time, the yield on The S&P 500 was pretty high. It was a little over 5%. So you get a little over 500 bucks. But the yield on bonds back then in 1980 was more like 11. If you had $10,000 and you were trying to get the most amount of income, you could have been easily steered towards bonds. And you got 1,100 bucks a year, not $500 back then. Interest rates are really high. Dividend on the S&P 500 was still high relative to today. But what's interesting is if you take this, and this is the study we did, if you were to take your income every year, put your 10,000 in both options, the aggregate bond index or total bond market index, and The S&P 500, in the beginning, you start out with less income from stocks. But over that period of time, if you spent all your income. So I'm not talking about dividend reinvest. I'm about talking saying every time you got a dividend, you spent it, didn't go back into your investment. And every time you got interest from your bonds, you spent it, so you didn't plow it back in. Well, if you fast forward until this year, well, where do you stand? Well, that 10,000 in bonds really only grew just really, I would say a tiny amount to about 13, 14,000. So call it a 40% rate of return. But you did continue to get interest along the way. On the stock side, you ended up with over $500,000 and the dividend grew dramatically. And today again, you're not reinvesting. Today is over 7,000. So you really had this flip flop. The income just from stocks relative to bonds. It started out way behind bonds and then over time it really caught up dramatically. So where do we stand today? The $10,000 in the S&P 500 would now be worth about $570,000. And your dividend today would be about $7,000 a year. On the bond side, the 10,000 really grew to about 14, and your dividend today would be $682. So it's a really dramatic difference over time, the change in income, stock dividends went up by about 1,200% and bond interest went down by about 40%. So what we don't usually hear about is that growth. So if you think about what does it take for that $500 a year to now be $7,000 a year, it's a huge amount of growth in the amount of money that gets paid out. We don't want to confuse that with the percentage yield. Back in 1980, the S&P 500 yielded over 5%. Today it only yields about 1.2%. But the aggregate amount of money that companies set aside to pay out cash dividends for shareholders has continued to go up almost year after year in step form. There's a few times. The Great Recession, financial crisis, we saw dividends go down for just a year and a half to two years, and then they resume their trajectory higher. And they're higher today than they've ever been. So as companies expand, they get more profitable, they have more cash flow, they tend to pay out more dividends. When a company pays a dividend, they don't want to just pay the same dividend every year per share. They want to inch it higher, inch it higher. And if you're looking to beat inflation, inflation over that same period of time grew about four times. So what was then $10,000 would now cost about $40,000. It's a big erosion of your, of your dollar. But the income just from dividends went up dramatically at about double the rate of inflation. So dividends grew at almost, let's call it 6% a year while inflation was at about 3. Now if we looked at total return, the numbers are even a little more dramatic. You look at total return, bonds actually made a fair amount of money over time. If you're reinvesting the dividends, buying more bonds, you had a. They outpaced inflation, called about 18 times your money over that long period of time. Stocks, though, about 180 times your money, 10,000 turned into over 1.8 million. Well, it's hard to even fathom those numbers.
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Krista DiBiaz
Unbelievable.
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Wes Moss
But that's the reality of long term investing. So both asset classes did well. One did exceptionally well. The reason I really like to focus in on the income side of that. If you need to take your income and you can't reinvest it, you still got growth over time when it came to stocks.
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Krista DiBiaz
All right, we'll go to questions now. This one came in from Joseph in Florida and I think it's kind of related to what you just talked about. Joseph says the U.S. money supply has been growing at a 7% CAGR. Long term, long term bonds. Bonds never keep up with this devaluation. Why bother investing in these losers?
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Wes Moss
Joseph, Joseph, you're cutting straight to the point here. Bonds. And the genesis of that is that as we grow our money supply that we know that was a big cause of inflation during the pandemic, we had tons of money supply dumped on the American economy. Too many dollars, chasing too few things. We get higher prices, higher wages, higher prices, inflation. And you're right, we're investing for outpacing inflation. And we know that stocks have been able to do that in dramatic fashion over time. The question though is that, well, what about bonds right now think about what bonds are paying today, 4 or 5%. Inflation's at around 3%, 2.9%. So even this year, bonds are still outpacing inflation. I wouldn't say that they're total losers. They're just a relative loser to stocks, of course, but they're also apples and oranges. I would say if I had to assign a fruit to each category, I would probably have to give my favorite apples to stocks. By the way, there's 7500 variety of apples and I'd have to assign bonds to oranges. They're apples and oranges. There's only about 750 kinds of oranges. So they're a little blander, a little more, let's call it one track. They're apples and oranges and I think they can work really well together. I want to go back by those numbers. I know we talked about this in the opening segment. Think about your total return for stocks over that long period of time. I just talked about. We're talking 45 years s and P500. If you took your dividends, you still had a price return that was 50. If you took all of your interest from that period of time, you had barely any sort of return from bonds. But you still you're collecting your income. Let's look at it maybe let's be a little more fair and look at this. On a total return basis, I'm going to reinvest all my stock dividends, but I'm also going to use bonds as an investment and reinvest my bond interest and get to buy more bonds. What were those numbers? The numbers come out to again, 180x your money. Pretty dramatic. 10 grand turns into over 1.8 million for stocks. Reinvested all your dividends. But bonds are not total losers here. I love the way he put this. They're actually up about 18 times your money over that period of time. Inflation was up four times. So again, what costs $10,000 now cost $42,000. $10,000 in the aggregate bond index. All of your interest reinvested, reinvested over all those years. You got to buy more bonds. The total return there is about 1,750% or 18x your money.
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Krista DiBiaz
Insane.
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Wes Moss
18 versus inflation at 4. So bonds still outpaced inflation by 4 times now. They're no match for stocks. We know that. But this is the perspective of back to apples and oranges. We're owning stocks for some income and a lot of growth over time depending on the kind of stock we buy. We're owning bonds. The oranges, let's call it the less variety fruit to have stability and at least some inflation fighting perspective. And the way I look at them is that even though over time we know stocks are the far and away winner 18x vs 180x over long periods of time. I think the oranges allow you to participate and spend more time with the apples. They work together is the way I look at it now. Not every investor needs that counterbalance. Not every investor needs the peace of mind that is well, gosh, stocks are down 25% right now my bonds are up 1. You can ride with markets and you can be 100% stock investor. But it takes a really strong constitution. It takes a lot of emotional stuff, strength, patience and long term vision to be 100% in stocks. What I find is if you add in these stability areas, I think of this as dry powder. Krista. Two to three years or more of dry powder. I think it allows people who otherwise wouldn't be as highly involved in stocks to be involved in stocks. So the oranges are allowing you the apples, if you will, and they work together and, and that's the way I look at this. Not total losers for bonds, relative losers. But I really think they have a place for a lot of investors. Joseph, maybe not for you, but for a lot of investors they do. But pretty awesome question. I like the way you just got right to the point.
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Krista DiBiaz
Yeah. All right, we'll go to Cynthia in Oregon. Cynthia says question for Wes regarding dry powder recommendations. Wes describes as monthly spending needs that are not covered by Social Security and pension times number of years you want to cover. Do you have any rules of thumb for retirees who have all of their regular expenses and usual spending covered by Social Security and pensions and only dip into other retirement accounts for occasional gifting or travel? FYI, we have a pretty high risk tolerance even nearing age 70. She said. Thanks for the information, love the show.
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Wes Moss
Cynthia is in a unique situation. She's in a really good situation where she's getting more income every month, pretty much guaranteed. I'll call Social Security a guarantee. Some people may disagree with me on that. But it's virtual guarantee. And it goes up with inflation, so it goes up with cpi. So it's a double edge. It fights inflation and a pension usually doesn't. Those are usually static. But let's, I don't know, did she give exact numbers? Let's just say she's bringing in 10,000amonth. I'm going to use round numbers here. And let's say that's net. We're not going to adjust that for taxes. And she only needs seven and that's her budget is seven for her and her husband. So she every single month has a surplus and it's virtually guaranteed and that's without touching any of her investment assets. So what is Cynthia's time horizon? Anybody in this situation would then fall into what I would. I'm going to give you a new rule of thumb I haven't talked about here on the Clark Howard show is that if you have a surplus and you're not touching your investments. What is your time horizon? What is it? What do you think?
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Krista DiBiaz
I have no idea.
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Wes Moss
It's infinite.
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Krista DiBiaz
Okay.
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Wes Moss
To some extent it's forever time horizon because you really never even need to get to your money unless you really want to.
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Krista DiBiaz
So I guess unless you're worried about long term, to me the healthcare expense thing is such a problem you have to worry about. Right.
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Wes Moss
But if you have $10,000 a month coming in and maybe you're not even tapping another 5 to $7,000 of investment income.
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Krista DiBiaz
Yeah, that's insane. And it still keeps, that's a great situation.
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Wes Moss
People keep it. But this is the same if somebody has 6,000 coming in and they only spend 4,000.
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Krista DiBiaz
Right?
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Wes Moss
Right. It's really. If you have guaranteed income above your income above your spending needs, then to some extent you have a forever time horizon. It's not a 10 year, it's not a 20, it's kind of forever. Now what that defaults back to then is okay, well what do you do? Do you invest like you have a really long time horizon or not? It's totally your preference at that point. So I can make the case that look, you don't really need your, your money to grow dramatically to outpace inflation because you already have that protected with your income streams. So you could be 100% in bonds and you're fine and you're still going to meet your goals. Because investing in financial planning is really about meeting your goals. If I'm able to spend all the money I want to spend and do all the core pursuits that I do in life, I'm winning the long term game that is retirement planning. @ the same time you could say, well, I don't really need to touch the money. Maybe I have heirs and I want them to inherit a lot. So I'm going to be more aggressive. It would be okay if it would be 100% in stocks because they have lots of time for it to recover because they're not really ever dipping into it. So really I think the answer here, when you have, I would maybe let's call it a quasi infinite time horizon, super long term horizon is that it goes back to your risk tolerance and your preference on how you would like to invest because both ends of the continuum should work for you. The new rule of thumb, okay? The quasi infinite time horizon.
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Krista DiBiaz
Love it. My name is Mary Catherine, but everyone calls me mk. I'm a self employed hairstylist and salon owner and I've been watching you Clark for years. A recent show really got Me thinking about my retirement or the lack of one waiting for me. I'm 46 and like many self employed folks, I don't have the back and benefits that come with a corporate job. Years ago, during my first marriage, I contributed to my then husband's 401k. When we divorced, I received half and rolled it into a 12 month CD. It's been several years and honestly it hasn't grown much at all. Now I want to move that $35,000 somewhere where it can truly grow. I've done some reading and research, but to be honest, I still feel lost. I want to contribute $100 a week going forward and I'm looking for the smartest, most effective way to invest this money for the long term. I'm remarried and still running my business full time, but I know I need to get serious about my future. If you could point me in the right direction or even just help me understand what to ask, I'd be so grateful.
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Wes Moss
MK love this independent business owner. So you've got somewhat of a start here. You have $35,000 MK and it's very cool to hear people that have listened to this for so long. I know, it's very cool. She's in the right place and I'm hoping I can help here. Because you're a business owner, mk first of all, it's never too late to start planning for retirement that I've seen People have pretty much no money in their late 40s and still end up with a, with a big chunk of savings. They usually work longer, but a lot of America, their kids are still in school and college and you don't get that off the payroll until you're 50, 50 later, mid-50s. So it's not crazy to not have a ton of savings. But because you're a business owner, mk, you do have an, I think some advantages here and that's to be able to do your own retirement account. If you're an independent contractor and you have your solo company, you can do what's called a solo for 1K. And you could do this at Schwab Fidelity. A lot of different places allow you to set this up and you can put away. This is the age under 50, 23, 500 a year, $23,500 a year. So you have lots of room to spend. I know that may sound like way too much. You can't save that right now. But that's the capacity and that's just the employer side of your solo 401k. You can also put another 20% of your net earnings in there. And there's some tax calculations that go into that. But I was looking at if I had $70,000 in income and I wanted to do a solo 401k, how much could I put away? The answer's about 35, 36,000. So you could save almost half of your income on a pre tax basis in a retirement type account. So that's the first part. It's savings savings. The second part is investing savings alone doesn't get us through the Iditarod. We've got to have both and savings I think part is easy because you could do a solo 401k. The investing part is that you've got to have participation in stocks if you, if you're going to outpace inflation over time. We just went over those numbers. Stocks up 180 times your money over. That's almost a half century. So it's a long period of time. Bonds still should outpace inflation, but they're not going to really fully do the job. So the way I look at this is a little bit goes a long way. You start with 100 bucks a month, $125 a month. And I think about the, the big picture math. $1,000 a month over 25 years. And these are just round numbers with the math. This is not the market. But if you choose an 8% compounded rate of return, $1,000 a month for 25 years gets you about a million bucks. What's the math MK, you're 46, so that gets you to 71. Still a long time. I know. Do half that. $500 a month gets you to about $500,000. If you do half of that 250 bucks a month, that still gets you to a quarter of a million. So just think about those long term. But you're not going to get at 8% sitting in cash. You're not going to get it in money market. You're not going to probably get that in bonds. So the place to be looking would be either real estate or publicly traded stocks. Super diversification. Own something like the broad market. And at that point you have a fighting chance to get that 7 to 10% rate of return that we've seen from the S&P 500 depending on the timeframe. And those are the two pieces of the equation that will get you to where you want to be and you have more time than you think.
- [21:42]
Krista DiBiaz
All right, good luck mk. And coming up straight ahead, you're going to talk about the future of productivity productivity and manufacturing in the United States.
- [21:51]
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- [24:01]
Wes Moss
This episode is brought to you by. Indeed, when your computer breaks, you don't wait for it to magically start working again. You fixed the problem, so why wait to hire the people your company desperately needs? Use Indeed's sponsored jobs to hire top talent fast and even better, you only pay for results. There's no need to wait Speed up your hiring with a $75 sponsored job credit@ Indeed.com podcast. Terms and conditions apply. The road is calling. Embrace the thrill of the drive with the fully electric Audi Q6E Tron, featuring effortless power and advanced Audi tech. The next chapter of Audi is here. Welcome back to Ask An Advisor. I'm Wes Moss along with Chris to Dibiaz, and we're going to talk about what sounds like not the most exciting title, manufacturing and what productivity. Do you remember the Jetsons? I bet you are. A lot of our audience remembers the Jetsons. I was absolutely, you know, remember George Jetson flying around, living in that looked like the building in Seattle.
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Krista DiBiaz
You know what I wish I had still is the food machine that would make them amazing dinners. You just press what you wanted. Or a Rosie the Robot.
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Wes Moss
Well, if you think about it, and I don't know if that was the 80s, it must have been the 80s when that was on television. But if you will remember, George Jetson, the lovable father of the family had this is a job in the future. Again, flying cars, all the things that we thought would be here by now that are mostly not here. But the innovations of the futuristic world were that everything was just done for you. And George Jetson's job was to do what? When he went to work, his sole job was to push a button.
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Krista DiBiaz
Oh, my gosh.
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Wes Moss
It was just to push a button. There was an episode where he came back from work and he had had a really tough day at the office because his boss made him push the button eight times that day. Wow, dad, sorry you had such a tough day at work. Turns out here we are in 2025, and the innovations that have helped us be more productive over time have not really gotten us to Jetson status. However, there's been a tremendous amount of productivity boost over the course of economic history. And if we go back and look at GDP and output, we one of the primary drivers of. I think of it as the army of American productivity, which is 160, 165 million plus people that get up every single day and go to the office and do a little bit every single day. Some people do a little bit every day, some people do a lot every day. But collectively, that's like, that's an unstoppable force. If you're in a free market economy with innovation and hard work, when that's rewarded, you're going to see things continue to get better and more productive. And productivity growth is really the secret elixir to GDP growth. So it's an important piece of the equation. If you look back over time. When we got back from the war, after World War II, we had a huge productivity growth in the United States. We were growing at 2 to 3 to 4% year after year after year. We're getting that much more productive. And I think about manufacturing in the United States. If you go back to that period of time, we had almost 20 million manufacturing jobs in the United States. Today we only have about 12.7 million manufacturing jobs. So the number of jobs has gone down dramatically. The output though, on the other hand, has gone completely the other way. So our output though, what we're making and what we're producing, the output per hour, with all the innovations, maybe not quite Jetson like, but highly evolved from the 1950s, 60s, 70s, and we continue to evolve every single year. We have now more output. The manufacturing output scale was at 40 back in the 1950s. Today it's over 100. So we went from 20 million jobs to 12 million jobs. And we went from the output of 40 to over 100 during that same period of time. So we're just better, smarter, faster and more innovative. And we continue to do so. The problem that I've seen over the last, let's call it a couple of decades is that we had that long run, from the early 1950s to the mid-80s, of 2 to 4% productivity growth. I'll call that the productivity green zone in America. Really every year everything's getting a little bit better, faster or dramatically. Then we went through a stretch from call 1985, really through, call it the pandemic, where productivity growth was more like 1 to 2% a year. So it didn't go away. It just was really, it was slower. Then we got to a period of time where I would call productivity growth pretty darn anemic. So we went from the green zone to the yellow zone. And then really if I look back when the red zone, I'll call it the red zone, started in about 2010 where we were really at the zero productivity growth, zero to one, zero to one. Then we had some pandemic noise. Then we got back to the yellow zone. And then just recently, over the past, call it year to two years, we're back in that green zone. We're back in increasing productivity. Most recent numbers were at two, almost two and a half, which doesn't sound like a lot, but that starts to look a lot like that period of time that we grew so dramatically. So we're getting at. Why is that? We don't know. Well, we do know, but we don't know exactly why. It's robotics, it's innovation, it's supply chain, all getting smarter. Is it also in the last couple of years, we don't know for sure, for sure. But is it the productivity boost of artificial intelligence? And artificial intelligence is not just a chat machine. It is really the insights of data and making everything that much more efficient, which creates more output per worker. And the other thought here is that the new frontier of, of growth and productivity growth may not be Silicon Valley and it may not be exactly in the areas that we're thinking. It may be hiding in plain sight in a place like the good old fashioned Midwest. And I bring that up because that's still where a lot of manufacturing is. That would be the middle stand. There's a German term called middle stand and it just means middle class. It means middle sized companies, usually privately held, that are highly specialized and they focus in on one thing that they do really, really well and they're so good at it that they control that niche. And they can be really, really dominant. But small companies and they're usually private so they're not having to worry about quarterly results. And we see that to some extent in the Midwest. In the United States, there's a company called LW Gore. It's a private company. They make Gore Tax. It's not just for rain jackets, but it's also for specialty, very highly specialized material that goes into surgical equipment as an example. So we see companies like this that are now 10, 12,000 people, highly specialized, highly innovative and they have continued to grow. Fastenal is another company that has become a publicly traded company. Not a buy or sell recommendation. They do just a couple of things. They make machine parts, nuts, bolts, and they're extraordinarily good at that. And it takes technology to be able to do that. So we may, as we continue to evolve and robotics gets better and we see more innovation being able to use our data because of AI, maybe that unlocks more productivity and we could see a manufacturing productivity boom and it could be hiding in the Midwest. And I think about this, think about, this is a car example I think we can all relate to. Think about the good old fashioned American SUV by General Motors 10 years ago. A Tahoe versus a Tahoe today. If you look at a 10 year old Tahoe and these are cars I've had, I still love them. A 10 year old Tahoe today looks like it was built in Cuba. A 2025 Tahoe or Escalade again, GM, big SUV looks like it was made by NASA. Look no further than the innovation and the stepping up just in the car industry. And if that continues, what happens over the next five years? Do we get more productivity growth? Maybe it's sitting right there in the good old fashioned Midwest. Maybe the old frontier is the new frontier. I think that's good news for the US economy. We'll see.
- [32:57]
Krista DiBiaz
All right, we're gonna go to questions now. We've got Joseph in New Hampshire this time. Joseph says I'm a 60 year old single and I have no kids that I know of.
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Wes Moss
Haha Joseph.
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Krista DiBiaz
And due to life events I have under 100k between a Fidelity 401k and a Fidelity Roth 401k. At the present time I contribute 20% of my gross income to the 401k and 5% to the Roth. My employer matches 5% total. It does pinch a bit at times. And my emergency fund is not at the point that I want it to be. I know I'll not be able to retire until 70 at least. And I own this fact and refuse to let it get to me. Good for him.
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Wes Moss
Good for you Joseph.
- [33:37]
Krista DiBiaz
I would much rather have more of an emergency fund which is closer to year a year's net pay on hand. Would I be wrong to cut back to 10% on the 401k and keep the Roth at 5% or should I do 5 on the regular and 10 on the Roth? I have a small car loan and a mortgage which totals about 1150amonth. 1150. The car loan is 8000 at this point and my health is excellent. Any advice? I am erring on the side of building my fund and contributing less to the 401ks until my fund is where I want it to be and then go back to the contribution level I am at right now.
- [34:14]
Wes Moss
You're right to want to build that emergency fund and you're doing the right things when it comes to 25% is obviously a really sure. He said it pinches a little bit so it sounds like he's able to do it. And there's nothing wrong with bolstering the emergency fund. The way I would look at this though is that to some extent if you're already 60 so you're past the 59 and a half demarcation line age wise as long as you've had that Roth 401K. And by the way, I would make sure you have a Roth IRA as well. Remember that five year rule we did a segment on that you want that to have at least a five year vintage even if there's no money in it. Because if you roll money in eventually from a Roth 401k to a regular Roth, you want it to have been open for five years. But to some extent your Roth 401k and a vintaged Roth IRA, that is to some extent an emergency fund in its, in its own right. So if you've got your 401k IRA money that's taxable when you pull it out, a Roth account is as good or better than a good old fashioned after tax account, right? Because it's no RMDs, it's no taxes when the money comes out, even if they're earnings. If you've held it for a certain period of time and you're past 59 and a half and you can tap it at any point. So no taxes, no RMDs, tax free money coming out, that really is your emergency fund, Joseph. So I would just rethink that a little bit and not overly stress about putting money in your after tax account because your Roth will kind of do that for you. So with that being said, I think what you could do is skew the percentages. It sounds like you're doing much more in the regular 401k. I would swing that percentage to the Roth, meaning that let's say you may not do 25% a year. Maybe it's going to be 20% because it's been pinching a little bit. Maybe 15% of that goes into the Roth 401K and only 5% in the regular 401K if the match works that way, depending on the free money match that you're getting. But I would be swinging more of my contributions towards the Roth 401k because ultimately that should be just as good or better than an after tax emergency account.
- [36:32]
Krista DiBiaz
Okay. And this one came in from Patrick in Arizona. I retired at 53 and have been traveling in my RV for almost 5 years. Next year I want to buy a house for about $300,000 and pay cash. I currently have $2 million one and a half million in a traditional IRA, 200k in a Roth IRA and 300k in dry powder. I will also draw about 90k between 65 and 67 from a private pension and railroad retirement. And, and my medical insurance is covered by the VA. I had 10 years in the Marine Corps. Thank you for your service. My question is, what is the best way to pay for the house? I would like to keep at least 200k in dry powder.
- [37:12]
Wes Moss
So is Patrick 53?
- [37:15]
Krista DiBiaz
He says he retired at 53. He's been traveling for five years, so I'm guessing he's 58.
- [37:19]
Wes Moss
Oh, he's 58. Okay. And he wants to buy a house next year. So will he be 59?
- [37:29]
Krista DiBiaz
Probably.
- [37:29]
Wes Moss
You know, I had a situation that I was helping an advisor with, and the family really needed, really was intent on buying this particular condo. And most of the money is similar to what? Well, almost all her money was IRA money, and she was only 59, and she actually turned 59 and a half about a month after the closing was scheduled. So she was going to pull money out of her ira, pay the taxes, and pay the penalty? Oh, no, I said you've got to wait. Just wait a month. Push back the closing. Push back the closing so that you could eliminate that 10% penalty. And that is a similar situation here because we're really trying to get Patrick to 59 and a half. Let's just say you're 58 when you're ready to do this, and you've got a little ways to go, you really don't want to tap the million and a half that's in the IRA because it's taxed and penalized by 10%. So that, to me, would be off the table. The $200,000 in the Roth account, the contributions, even if you're not 59 and a half, should be. That should be on the table as long as you've had that Roth for five years. But the growth will get taxed and penalized if you still don't meet the 59 and a half requirement. So that leaves you with the dry powder. And again, I'm assuming you do this before age 59 and a half, then the dry powder, you want to pay cash but still have 200,000 left in dry powder. That would wipe out your dry powder. So my thought here, Patrick, would just be, don't eliminate all of your dry powder. I think that that can be a mistake. What I would probably do is maybe use half of it, 150,000, and then have a small manageable mortgage on 150,000. That's why we. That's why the mortgage was invented, is so that you don't have to pull big chunks out of your assets, particularly. Particularly retirement money, which then increases your tax bracket, even if you are 59 and a half plus, you're still going to jump your tax bracket if you use that money. So you don't want to take big chunks out of these regular retirement accounts. Particularly before 59 and a half. But even after 59 and a half, to be able to buy a big asset like this. So the mortgage is a solution to be able to not get in this tax tsunami that I want you to be able to avoid. Everything gets a little easier at 59 and a half, provided you've had that Roth IRA for five some years. And then you can go ahead and use that money too. And now you have more like 3, 500,000 in dry powder, 200 Roth 300 in the after tax account. But my considerations would just be it's okay to have $150,000 mortgage if you're going to do this. And then after 59 and a half, your options open up.
- [40:28]
Krista DiBiaz
All right, this question's from Sharissa in California. Hi, Wes. She says, hi, Wes. By the way, I love the whole Clark Howard team. Everyone who writes the blogs and website all have been instrumental in changing my life. So thank you from the bottom of my heart.
- [40:42]
Wes Moss
That's cool.
- [40:43]
Krista DiBiaz
Thank you. As a person who looks at money as making me feel secure and at peace, you all remind us to save and enjoy life too, and in the end have enough to feel safe. My question is regarding converting our traditional IRA to our Roth. So combining the two, currently our tax brackets are 22% Fed and 4% California. Our Roth IRA is at just over 87,000 and traditional is over 55. I haven't contributed to the traditional IRA in years. It's so old, it keeps growing. The Roth I've been saving in since I was about 40 years old and I'm 56 now. I really love all the flexibility of the Roth money. I'll be receiving a pension and have about $152,000 in a Roth 401K at work. And I plan to delay Social Security to try to maximize the amount I get. My husband is 67 and neither of us have long term care insurance. And at this late stage in the game, doubt we'll be able to afford it. I was hoping to maybe use the Roth money if we ever needed it for long term care or maybe pay off a house that we planned to buy and we could only put down about 10% at this time. I'm hoping by the time I'm 75 I can pay the house off. I net about 5400 and my husband collects 2315 in Social Security only do we convert our traditional to roth in our IRAs. Now I don't think I will have a lower tax bracket in the future and the pension will be about $4,000 a month.
- [42:08]
Wes Moss
Charissa, this is a tax today versus tax tomorrow question. And I think you you knowing that you're going to be in the same or higher amount of income out into the future because of your pension and social and put all these things together, income streams, then that makes this a really good time to do the Roth conversion. Really, you only have about 50 of all the different Roth savings. 152,000, Roth 401k and another Roth account. The IRA is only 55,000. That is not a ton to convert. It's a lot to convert in one year. But Trissy, you're only 56, so you could do, let's call it 18 grand a year for the next three or four years and you're done. And I bet you. And again, you just have to run the taxes on this and look at the tax bracket. Talk to a CPA or an accountant to run these numbers for you. But there's a very good chance that you could do 18,000 to $20,000 a year and still stay in that same tax bracket. Stay and not go through the 22% bracket. You've got to also consider California, but I don't know if that would change your California bracket either. So just run the numbers. But sure, the next three years, divide that regular IRA up and convert it slowly. You have plenty of time to do so. And if your taxes are going to be as high or higher or income as high or higher in the future, this is the time to do it. So you're right on it.
- [43:36]
Krista DiBiaz
Would you recommend going to a CPA for most people when they're trying to figure this stuff out?
- [43:41]
Wes Moss
Yes.
- [43:42]
Krista DiBiaz
Okay, just checking, full stop.
- [43:45]
Wes Moss
Yes. Taxes are complicated and there's so many different tentacles that come into play over time. As your income goes up, different things start happening. It's really important to look at a tax projection to understand what your overall taxes are and all the things that get impacted as your income goes up. IRMAA is another example. How much you're paying for Medicare. Highly, highly influenced by. Of course it's your income, but it matters how much you pull out of an ira. You could pull this much out of an ira, let's call it a moderate amount and stay in the IRMAA bracket. You want a couple dollars above that and all of a sudden you're in a much higher Irma bracket in a couple of years.
- [44:31]
Krista DiBiaz
Wow.
- [44:31]
Wes Moss
So you got to be careful in so many different ways. I just feel like tax advice is super important. I rely a lot on my CPA and my CPA team, even though I have a real understanding of taxes, You've got to go through the whole process to really get a clear picture. So, yes, invaluable.
- [44:50]
Krista DiBiaz
Does your firm have a CPA, or do you guys recommend people talk to CPAs? How does that work?
- [44:54]
Wes Moss
Both. We have a CPA, so a lot.
- [44:56]
Krista DiBiaz
Of firms have that. Okay.
- [44:58]
Wes Moss
Not every financial advisory firm has a CPA team or a tax team as well. But we do as well.
- [45:04]
Krista DiBiaz
It's one thing I have to say.
- [45:05]
Wes Moss
I rely on the world.
- [45:06]
Krista DiBiaz
Like, I've learned a ton working with you over these last months, but. And over the years I've known you. But that is a huge takeaway for me is this whole just the taxes. I never thought about it enough. I sort of had it simplified in my mind.
- [45:18]
Wes Moss
Big piece of the equation.
- [45:20]
Krista DiBiaz
Anyway, learn something every day from you, Wes. And I learned something every day from Clark. And so grateful for that. So grateful for everyone who listens and who watches. Please, if you enjoy this podcast, please share it with a friend. Recommend it. Follow us on whatever platform you use to listen or if you're on YouTube. YouTube. Subscribe to our channel, YouTube.com Clark Hope you have a great rest of your day. Thank you so much, Wes. And we'll be back with you again one week from today.